Income Tax Return Filing For Futures And Options (F&O)Traders : All You Need To Know

Futures and Options (F&O) trading has gained significant traction among traders in India. However, when it comes to F&O tax implications, many people are either unaware of the rules or assume it’s not necessary to report F&O transactions in their Income Tax Return (ITR).

A possible reason for this misconception could be the fact that nearly 93% of F&O traders incurred an average loss of ₹2 lakh each in FY23 and FY24, according to SEBI reports. This often leads people to believe that if they’ve faced losses, there’s no need to declare them. 

But here’s the truth:

“As per Section 43(5) of the Income Tax Act, profits and losses from F&O trading are classified as non-speculative business income.” So, it's vital to report both profit and loss under the head “PGBP ( Profits & Gains from Business and Profession).”

Failing to report F&O profits or losses can result in income tax notices, as all transactions related to the purchase of securities are reflected in the Annual Information Statement (AIS). 

Let us look at the essential points regarding income tax on F&O trading in India. 

Understanding F&O Taxation

Computation of Income from F&O

For computation of income from F&O, books of account must be prepared while filing income tax returns.

The taxable income is calculated as follows:

• Net Profits: Profits from F&O trading after deducting expenses.
• Net Losses: Losses can be adjusted against other income sources except salary income and can be carried forward for eight financial years.

Allowable Expenses

Since F&O income is considered business income, traders can claim deductions on expenses directly and exclusively related to their trading business, such as 

• Brokerage charges 
• Commissions paid to brokers, 
• Trading journal subscriptions, 
• Telephone and internet costs, 
• Professional advisory fees and 
• Other trading expenses.  

Which ITR Form is Used For Reporting F&O Income?

F&O traders can file their income tax returns using ITR-3 (for individuals and HUFs). This form is designated explicitly for taxpayers with PGBP Income.

Tax Rate Applicable on F&O Income

F&O profits are added to the trader’s total income and taxed as per the applicable income tax slab rates.

Do F&O Traders Need to Maintain Accounting Records?

Since F&O trades constitute business income, traders must comply with mandatory tax regulations in this regard.

Suppose you are running the business as an individual or a Hindu Undivided Family (HUF), and your income exceeds Rs 2.5 lakh or gross receipts exceed Rs 25 lakh in any of the 3 preceding years or the first year of business if it’s new, then you are required to maintain proper books of accounts.

However, for taxpayers other than HUF or an individual carrying on a business, the income limit is Rs 1.2 lakh, and the gross receipts limit is Rs 10 lakh.

So ensure that your trading statements, bank statements, and expense receipts are handy since your profit and loss account (P&L) and balance sheet will be prepared from these documents.

Is Tax Audit Mandatory for F&O Trading Under Section 44AB?

Tax audit under Section 44AB of the Income Tax Act is required for F&O traders only under certain conditions. 

Conclusion

Reporting income tax on F&O trading in India is crucial under Indian tax laws. It is essential to categorise F&O gains or losses as non-speculative business income, file using the appropriate ITR-3 form, and maintain clear records of all expenses and turnover calculations. If you find it difficult to assess your tax liability, consult an experienced chartered accountant (CA) for your requirements.

Disclaimer: The information related to the tax filing presented in this blog post is generic. Please consult your tax advisor for tax filing advice about your case.